Exxon Mobil (NYSE: XOM) is now the third largest publicly traded oil firm on the earth, behind Chevron (NYSE: CVX) and Saudi Aramco (ARMCO). The corporate has just lately introduced that it is continuing on its Payara offshore growth, with manufacturing anticipated to start in 2024 at 220 thousand barrels/day.

That’ll push complete Guyana manufacturing in direction of 560 thousand barrels/day. As we’ll see all through this text, the continued development of the corporate’s initiatives in these troublesome instances highlights how undervalued the corporate is.

Exxon Mobil – Exxon Mobil

Exxon Mobil Guyana

Exxon Mobil is progressing ahead quickly with Guyana.

Exxon Mobil Guyana Progression – Exxon Mobil Investor Presentation

Exxon Mobil just lately began up Liza Section 1 with its 45% stake at a internet $35/barrel price. It expanded to Liza Section 2 with 220 thousand barrels/day at $25/barrel price. Now, the corporate is beginning up Payara with 220 thousand barrels/day in manufacturing at $25/barrel breakeven. Brent crude trades at almost $43/barrel.

Right here, Exxon Mobil has 560 thousand barrels/day of manufacturing. Exxon Mobil’s stake is simply over 250 thousand barrels/day incomes $18/barrel in earnings. That is $1.6 billion/12 months in annual earnings alone. At a good valuation, assuming no development, that’d worth the invention at roughly $25 billion. That is almost 17% of the corporate’s market capitalization.

Nevertheless, it is value noting Payara, like the corporate’s different discoveries, is drilling roughly 80 million barrels/12 months on a 600 million barrel discovery (~Eight 12 months reserve life). The corporate has 16 discovered prospects right here out of 18 complete drilling makes an attempt. It has greater than 50 leads and continues to have discoveries averaging ~500 million barrels every.

If Exxon Mobil continues growing four leads each Eight years, to keep up constant manufacturing with an 8-year reserve life, the general reserve lifetime of manufacturing in Guyana, from all of its leads, can be ~120 years for the 60 profitable performs. Constant manufacturing can be nearly 900 thousand barrels/day.

Which means constant manufacturing attributable to Exxon Mobil can be ~400 thousand barrels/12 months. Assuming no price enhancements, and a continued $25/barrel price foundation, together with $45 Brent (only a hair above present costs), meaning nearly $three billion in annual earnings for 120 years. That may worth this enterprise at ~1/three of the corporate’s market capitalization.

Nevertheless, this highlights the power of the enterprise.

Exxon Mobil Permian Basin

One other main enterprise for the corporate is its continued Permian Basin developments.

Exxon Mobil Permian Basin – Exxon Mobil Investor Presentation

Exxon Mobil has a useful resource base of 10 billion barrels within the Permian Basin. Because it ramps up in direction of a goal of 1 million barrels/day in manufacturing, that represents a virtually 30-year reserve life and a big a part of the corporate’s manufacturing (greater than 20%). The corporate expects to have the ability to maintain its growth tempo, with the general property, into 2040.

Exxon Mobil expects to lower production costs to $15/barrel. WTI costs are only a hair over $40/barrel. Assuming a slight enhance to $45/barrel, that’d imply $30/barrel in earnings. At 1 million barrels/day of manufacturing, meaning the potential for $10 billion/12 months in annual earnings from this enterprise. That greater than justifies the corporate’s valuation.

The corporate has continued to decrease prices and enhance manufacturing because it strikes in direction of improved operations. This large growth highlights the power of Exxon Mobil versus its oil opponents, how the corporate can merely enter an trade and dominate, attaining a scale nobody else can.

Exxon Mobil Different Initiatives

Previous this, Exxon Mobil has quite a few different thrilling initiatives. The corporate is getting into LNG is a gigantic means, with Mozambique LNG. In PNG, the corporate can be engaged on its LNG portfolio. The corporate sees the power to generate greater than 20 MTPA from its varied stakes in companies right here, because it spends billions on growth.

The corporate additionally has greater than 2.5 million acres off the coast of Brazil. It’s the operator within the majority of its acreage. Brazil and LNG are comparable initiatives close to Guyana and the Permian Basin, though not as developed. These initiatives can help Exxon Mobil.

Exxon Mobil Total Money Move

Exxon Mobil stays centered on its general money circulate and its portfolio. The corporate expects a $1.8 billion boost in cash flow in the 3Q from the partial restoration in oil costs and that may be anticipated to proceed its restoration. The corporate is constant to deal with its development that can help general money circulate development.

Exxon Mobil Money Move – Exxon Mobil Investor Presentation

Exxon Mobil’s money circulate issues; the above graph reveals the corporate’s forecast from a pre-COVID-19 world, again when it was anticipating greater than $30 billion in annualized spending. It is value highlighting right here that the corporate has the power to proceed paying the capital spending even at $40/barrel oil.

Let’s assume COVID-19 delays the corporate’s plans by 1-2 years. That’d level to 2027, at $60/barrel, FCF of roughly $30 billion. Given the corporate’s market capitalization of lower than $150 billion, that will imply a market cap to FCF ratio of slightly below 5 with a long-term restoration in oil costs. That 20% FCF yield that is persevering with to fund development is extremely important.

Exxon Mobil continues to have important danger from the markets that it function in, however undefeatable FCF and the power to reward shareholders.

Exxon Mobil Debt and Financials

Let’s put this all collectively to check out Exxon Mobil’s debt and monetary image.

Exxon Mobil Monetary Image – Exxon Mobil Investor Presentation

Exxon Mobil has dramatically elevated its liquidity because the begin of the COVID-19 associated oil crash to be able to higher place the corporate. The corporate has additionally lowered capital expenditures and working prices. At the moment, the corporate has greater than $10 billion of money and $15 billion in revolving credit score services.

Exxon Mobil has managed to issue this debt at a great yield. The corporate’s 10.5 12 months bonds issued throughout COVID-19 got here at a ~2.6% yield. That is an extremely manageable yield for the corporate with a multi-billion greenback issuance. Exxon Mobil has almost $70 billion in LT debt with its lower than $15 billion in money. Nevertheless, its curiosity funds are ~$2 billion yearly.

That is extremely manageable for the corporate. It additionally signifies that the corporate has important development alternatives, ought to it select to seize them. It might probably concern extra debt to amass different undervalued firms.

Exxon Mobil Threat

Exxon Mobil’s danger is the possibility of a continued drop in oil costs. Whereas the corporate can see earnings enhance by $1.Eight billion in 3Q 2020, as a result of COVID-19 and the associated value collapse, it might additionally see the worth restoration reverse. That would place the corporate in a way more troublesome place. That place is one which may pressure extra spending cuts.

It might doubtlessly additionally trigger the corporate to chop spending even additional, delaying long-term money circulate. Whereas Exxon Mobil has a market main portfolio of property, the corporate continues to face the commodity value dangers of a commodity it doesn’t management.

Conclusion

Exxon Mobil has a powerful portfolio of property that it’s persevering with to work in direction of growth. The corporate has numerous distinctive alternatives which have the potential for many years of great manufacturing. The corporate might have hundreds of thousands of barrels of low price manufacturing/day that would present important FCF.

That FCF stands to generate the corporate important rewards. The corporate may very well be buying and selling at a 20% FCF yield. That yield is very large, and it highlights how undervalued the corporate is, particularly mixed with the corporate’s manageable debt and continued low rates of interest. This highlights how undervalued Exxon Mobil is and it is an incredible funding.

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Disclosure: I’m/we’re lengthy XOM, CVX. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (aside from from In search of Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.

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